Builders told to construct $400 million PNG hospital for $170 million

Australia will honour a multi-million dollar pay-off promised to Papua New Guinea to settle unwanted refugees - even though PNG is moving to shut down the Manus Island detention camp.

Builders are being asked by the Turnbull government to take a carefully designed masterplan for a new $400 million hospital in PNG's second largest city, Lae, and do their best with a budget of only $170 million.

Australia only ever agreed to fund half the hospital development, but PNG has been unable to produce "up to $150 million" in matching cash.

The promised hospital was originally part of the deal struck by Kevin Rudd with PNG Prime Minister Peter O'Neill on the eve of the 2013 election to super-charge the Pacific solution and encourage PNG to settle refugees.

The contract to build the hospital calls for maximum "positive publicity" for Australia - but may instead be a case of wishful thinking.

Progress is now almost a year behind schedule.

Contractors have also been asked to take on faith that Australia will soon sign an agreement with local authorities for "reasonable access" to the building site, despite Australia also warning access cannot be guaranteed.

Meanwhile, the Department of Foreign Affairs and Trade has issued a tender on the basis of construction plans it admits must be dramatically redrawn by the successful bidder because of $230-million lower than expected budget.

The tender documents, which had been anticipated in November last year, declare the aim is to develop the hospital "in alignment with the approved masterplan in order to deliver a high quality, fit for purpose and sustainable hospital facility for the people of PNG."

But the bidders are told "the scope of the masterplan exceeds the available budget".

Australia has pledged $170 million funding for the hospital. The tender documents state the budget "may increase" depending on money from PNG.

The contract also puts the burden on the winning bidder to manage the trust accounts should PNG eventually tip in cash.

At a meeting on the tender in Port Moresby this month, potential bidders quizzed Foreign Affairs officials about the shortfall and how the project would go ahead.

Bidders queried access to the site, saying this "greatly increased the risk of this contract" and said it was complicated to quote for a design review "as the scope and scale of the project is not finalised".

DFAT said the successful bidder "will be required to review the masterplan to identify what can be delivered within the available budget".

The tender documents state the project is funded by the Australian aid program, and calls for a communications strategy to "maximise opportunities for public diplomacy and positive publicity".

In response to questions from Fairfax Media on the Lae hospital, a DFAT spokesman said Australia was committed to funding up to 50 per cent and the two countries had agreed to a "phased approach" to the project.

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"This would allow for an initial redevelopment that could be expanded as Papua New Guinea funding is identified," the spokesman said.

No timeline has yet been announced for the closure of the Manus Island camp.

Daniel Flitton is senior correspondent for The Age covering foreign affairs and politics. He is a former intelligence analyst for the Australian government and was at one-time a university lecturer specialising in international relations.